Delayed entry from Wednesday 26th Nov.

Do you remember the good old days?

The time, when a US rescue package worth the giant amount of USD 160 billion, could turn all markets around. Some economists even said that it would save the US economy from recession. Today (or more precise, last weekend) it wouldn’t even be enough to save a leading US bank……….

It leads to the headline from the stock market comment last week. Good news are doable, but the price is high and getting higher – I think that became clear for everybody during last Sunday. During the weekend the amount that the US government has guaranteed exceeded USD 7800 billion (through Fed, direct capital injections, through other channels, etc), the news agency Bloomberg calculated. It represents more than half of the total US GDP in 2007.

Only a few months ago President Bush presented the USD 160 billion package but today that amount would make people laugh. It shows how severe forces we are up against, as it requires bigger and bigger rescue packages to generate good news……..

A significant part of the risk are guarantees from Fed, but I am convinced that parts of the guarantees will be changed into cash obligations (i. e. real public debt).In addition Fed has raised their risk profile as yesterday’s rescue package included a direct credit risk.

One thing is for sure, the US Treasury will need to issue more debt. Also certain is that there will be buyers, but if you believe in the supply and demand curve, then the bet should be, that buyers are only to be found at higher interest rates. The efforts done with the endless number of US rescue packages are good and partly necessary. The price for many years with too low interest rates and excessive borrowing in the private household sector, is higher US T-Bill yields, particularly in the long end.

Japanese life insurance companies today said that they don’t buy US T-Bills at the current prices. China is a natural buyer with their USD 2 trillion large reserves, but China has its own rescue package of USD 600 billion now. Technically a country can not just take money from the currency reserves and spend domestic, but they can issue more debt. In that case a country might be more comfortable with currency reserves consisting of more cash or short dated T-Bills (i.e. avoiding the longer maturities). The Treasury Department should consider to hire some of the fixed income sales people that are around these days…….

I am not worried about, if US will get the debt financed, it’s just a matter of the price. What worries me is when the financial markets start to focus on the problem. Right now are rescue packages taken positive, but even the US President can’t save the world from itself. One day the US budget can’t take more obligations on, but who will decide when we have reached this point? The public opinion in US, the politicians on Capitol Hill or the financial markets?

If the US politicians wait until the financial markets say “enough”, then the obligations probably have become excessive. The US Treasury then truly has translated a short to mid term problem into a long term painful problem. We are not there yet, but………..

By the way, the (+1) 202 622 2000 phone number is to the switch board at U. S. Department of the Treasury.

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